Japan's economy

Respite without reform

The economy looks headed for yet another short-lived bounce later this year

JUST two months ago, April 1st was being billed as Japan's day of reckoning. Doomsayers predicted that, as the government partially repealed deposit insurance, to coincide with the start of a new financial year, jittery savers would panic and rickety banks would buckle. But by fiddling the rules a bit, the government helped to defuse this threat, which had anyway been overblown. So when the once-dreaded date arrived, the only economic event worth noting was the release of a prominent quarterly business survey. Its prognosis: far from sliding into crisis, the economy seems poised for a fillip.

The companies polled in the latest Tankan survey are still suffering, of course. Among large manufacturers, pessimists outnumbered optimists by 38 percentage points in the quarter just ended (see chart). Yet for the first time since September 2000, that figure has stopped getting worse. Moreover, those companies expect their prospects to become much brighter over the next quarter, as America's improving economy bolsters exports and profits abroad. And so, as the clouds begin to lift, it looks more likely than ever that Junichiro Koizumi's government will avoid tackling the most difficult reforms.

Although it has averted a banking crisis, the government has once again done so mainly by helping the banks avoid their problems. In late February it meddled with stockmarket rules to boost equity prices, helping to lift the value of the shares on banks' balance-sheets at the end of the financial year. And though it will unveil the results of special bank audits later this month, few onlookers expect an honest assessment of their plight.

Instead, Mr Koizumi's economic team continues to talk up other ideas for fixing the economy. His budget for the coming fiscal year, which passed the Diet (parliament) last week, calls for a 1.7% cut in overall spending. Though budget cuts rarely help in recessions, Mr Koizumi argues that channelling money to weak companies in glutted industries has only made Japan's deflation problem worse. Having got his way on spending, the prime minister is now turning his attention towards reforming the Japanese tax system.

Since Japan's tax code is so inefficient, Mr Koizumi could improve it in any number of ways. This week, his three-party coalition said it wants to scrap the rules that stifle demand for property. Japanese businesses, meanwhile, complain that high tax rates make it harder for them to invest and grow. Large companies polled in the Tankan survey forecast an 8.4% drop in capital spending this year. With internal profits low and bank loans shrinking inexorably, the government is keen to help them through corporate tax cuts. Lastly, besides bolstering land prices and encouraging investment, Mr Koizumi's team hopes to close some loopholes in the tax code, so that any cuts in tax rates will not increase Japan's public debt too much.

Though much depends on the details, most of these changes seem worth making. But even if Mr Koizumi can push them past the powerful Finance Ministry, and reach agreement on a decent tax deal with his party's faction leaders, tax reform alone is not going to fix Japan's problems. Richard Jerram, chief economist at ING Barings in Tokyo, likens the current approach to “listing all the structural reforms from A to Z, and then crossing off the ones that are impossible, until you get to tax reform”. But if the tougher reforms are impossible now, imagine what will happen if the pressure for change starts to diminish because of a mild recovery.